Accounting Class 1

Accounting Chapters 1, 2, 19 Finance Ch 1

•Why does someone go into business?

The Income Statement

Revenue 10,000Cost of Good Sold 6,000Gross Profit 4,000Selling and admin 2,500EBIT 1,500Tax 750Net Income 750

The Balance Sheet

Balance Sheet Assets Liabilities and EquityCash 23000 Acc pay 11000Supplies 2500 note pay 60000Equipment 105500 Equity 60000Tl Assets 131,000 131,000

Notice that Assets = Liabilities and Owner Equity

What is Accounting?What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting is to:

(1) identify, record, and communicate the economic events of an organization to interested users.

(2) Identify – events relative to the business.

(3) Record -systematic, chronological diary of events (bookkeeping) – needs to be complete, accurate and timely.

• Complete – missing info, don’t get the whole picture. Dan’s accting – no receipts when cash is close.

• Timely – 6 mo later, - can’t make decisions timely.Dq – cash flow

• Or not balancing give way to doubt

• Valuation methods – always challenging

• Timing, inventory, interest calc methods, depreciation

(4) Communicate – via reports called financial statements.

COMMUNICATION

• The reports that the accountant prepares are used to make critical decisions – Investing in a company– Expanding operations– How to finance the company– Stock prices– Loan agreements

• They must be prepared timely and accurately.

Common Questions Asked User

1. Can we afford to give our employees a pay raise?

Human Resources

2. Did the company earn a satisfactory income?

3. Do we need to borrow in the near future?

4. Is cash sufficient to pay dividends to the stockholders?

5. What price for our product will maximize net income?

Who Uses Accounting Data?Who Uses Accounting Data?

SO 2 Identify the users and uses of accounting.

6. Will the company be able to pay its short-term debts?

Investors

Management

Finance

Marketing

Creditors

The Building Blocks of AccountingThe Building Blocks of Accounting

Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.

Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.

Congress passed Sarbanes-Oxley Act of 2002. to reduce unethical behavior.

Effective financial reporting depends on sound ethical behavior.

Ethics start with you -

Various users need financial information

Various users need financial information

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP)

The Building Blocks of AccountingThe Building Blocks of Accounting

SO 4 Explain generally accepted accounting principles and the cost principle.

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)

SO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of AccountingThe Building Blocks of Accounting

http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/

Audit

Taxes

Attest - Opinions

What does a CPA do?What does a CPA do?

SO 4 Explain generally accepted accounting principles and the cost principle.

Cost Principle (Historical) – dictates that companies record assets at their cost.

Issues:

Reported at cost when purchased and also over the time the asset is held.

Cost easily verified, whereas market value is often subjective.

Fair value information may be more useful.

The Building Blocks of AccountingThe Building Blocks of Accounting

SO 4 Explain generally accepted accounting principles and the cost principle.

Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money.

Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Proprietorship.

Partnership.

Corporation.

AssumptionsAssumptions

SO 5 Explain the monetary unit assumption and the economic entity assumption.

Forms of Business Ownership

AssetsAssets LiabilitiesLiabilitiesOwner’s EquityOwner’s Equity= +

Provides the underlying framework for recording and summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership claims.

The Basic Accounting EquationThe Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

Accounting’s Building Blocks

GAAP

Cost Prinicpal

Economic Entity

Monetary unit

Assets = Liabilities + Owner Equity

Double Entry accounting: Debit and Credits

PostJournal Trial Balance

Income Statement

Owner Equity

Balance Sheet Cash Flow

Is it a transaction? Is it ours?Identifying

Recording

Communicating

5 Account Classes

Normal Bal Fin Stmt

AssetsLiabilitiesEquity = CapitalIncomeExpenses

DRCRCRCR

DR

BSBSBSISIS

Homework answers• E1-5• Classify each account• _L_ - accounts payable• _A_ - Cash• _A_ - Cleaning Supplies• _A_ - Cleaning Equipment• _A_ - Accounts Receivable• _L_ - Notes Payable• _L_ - Salaries Payable• _OE- KM Capital

Using The Basic Accounting EquationUsing The Basic Accounting Equation

Transactions are a business’s economic events recorded

by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

SO 7 Analyze the effects of business transactions on the accounting equation.

Q1-15: Are the following events recorded in the accounting records?

EventSupplies are purchased on account.

Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed?

SO 7 Analyze the effects of business transactions on the accounting equation.

An employee is hired.

Owner withdraws cash for personal use.

Record/ Don’t Record

Transactions (Question?)Transactions (Question?)

The T AccountMarsha’s Famous Apple Cakes!

I woke up this morning and decided to start a business baking my world famous apple cakes. I purchased $100 in supplies and baked 3 cakes today! And sold one cake to my favorite accounting student for $25

Cash Equipment

$100 $100

Sales

$25 $25

There is ALWAYS a debit and a credit.Debits are not always good and credits are not always bad.Practice Flexible thinking!

Analyze the transactions

Determine the accounts to use

Journal the transaction

Post to the ledger accounts

Create a trial

balanceCreate Balance sheet using ___________&____________ accounts

Create income statement using _______& _____

accounts

Create Owner Equity Statement

Close out temporary accounts

Create a post closing trial balance

The Building Blocks of Accounting – the process

IdentifyingRecording

Communicating

ASSETS = LIABILITIES + OWNERS EQUITYASSETS LIABILITIES + OWNERS EQUITY=

DR CR DR CR

EXPENSESDRAW

REVENUE

+ - - +NORMALBALANCE

NORMALBALANCE

The Bank makes accounting confusing.• When the bank

debits your account they ______ money.

• Assets for the bank:___________

• Liabilities for the bank:___________

• You add money to your bank account with a _________.

• Cash is an _______ for you.

• A loan is a __________ to you.

take

LOAN

DEPOSITS

DEBITASSET

LIABILITY

DOUBLE ACCOUNTING SYSTEM

There are always two entries

A debit (left)

And

A credit (right)

Debits and credits = flexible thinking!

• DEBITS – On the left– Increase

• assets, • expenses, • Draw

• Comes from the Italian “debito”

which comes from the Latin “debita” and “debeo”

which means:OWED TO the proprietoror an asset of the proprietor

•

Debits are not good or bad, they either increase or decrease an account!

• CREDITS – On the right– Increase – Liabilities– Owner equity– Revenue

•Comes from the Italian “credito”which comes from the Latin “credo”which means:Trust or belief (in the proprietor)or OWED BY the proprietor

Steps in the recording process1. Analyze each transaction for its effects on the

accounts. – What accounts, debits or credits?

2. Enter the transaction information in a journal.

3.Transfer the journal information to the appropriate accounts in the ledger.

Journal entries

• Simple debit credit– Cash (1) 5000– Sales, Bakers and Dad (1) 5000

• COMPOUND– CASH (15) $4000– ACC RECEIVABLE (15) $3000– Sale, Bakers and Dad (15) 7000EACH JOURNAL ENTRY SHOULD HAVE A UNIQUE

NUMBER

The Journal

• Is like a checkbook register.• It’s a record of transactions• Recording the transaction, but not a running

balance.• Chronological order• Audit trail• Always list the debit item first

The General Journal1.Discloses in one place the complete effects of a

transaction.2.Provides a chronological record of transactions.3.Helps to prevent or locate errors because the

debit and credit amounts for each entry can be easily compared.

4.A simple journal entry involves only two accounts (one debit and one credit) whereas a compound journal entry involves three or more accounts.

Journal Practice

• You took me to a business lunch and spent $30

• You bought some supplies for $50 with your visa.

• You paid your employee $100• You Paid the rent $500

THE “T” ACCOUNT

ACCOUNT NAME

Left

DEBITS

Right

CREDITS

ReceiptsPasta House

$25.00

McAllisters

$100.00Taco Bell

$5.00

1st step is to journal

Employee lunch exp $25 Cash 25

Employee lunch ex $5 Cash $5

Board Dinner $100 Cash 100

ReceiptsPasta House

$25.00

McAllisters

$100.00Taco Bell

$5.00

Dining Out

Cash

25.00 5.00 100.00

125.00

25.00 5.00 100.00

125.00

A General Ledger contains the entire group of accounts maintained by a company.

The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.

The LedgerThe Ledger

SO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-15

T-account form used in accounting textbooks.

In practice, the account forms used in ledgers aremuch more structured.

Standard Form of AccountStandard Form of Account

SO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-16

Trial Balance

List accts with drAnd cr balancesDr should = CR

Trial Balance

DR CR

Cash 11000

Acc Rec2000

Acc pay 5000

Sales 10000

Capital 2000

Exp 5000 _____

17000 17000

The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a transaction.

The Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.

Limitations of a Trial Balance

T account practice

Accounting Inclass Activites and Notes 38

1. Journal the entries, including the two already posted

2. Post the following transactions to T Accounts.

3. Determine the ending balance for each account.

4. Do a trial balance5. Do an income stmt and bal

sheet, and OE stmt.

Transactions

6. Started business with $20007. Purchased equipment on visa

$5008. Paid rent $10009. Paid $250 on visa card10. Sold 100 cakes for $40 each11. Bought $50 flour at Costco12. Bought ad in newspaper $60 on

visa13. Withdrew $350 for draw

cash Visa (a/p)

supplies Equipment

sales advertising

capital Rent Adv

Journal entries

Accounting Inclass Activites and Notes 39

1. CASH 2000CAPITAL 2000STARTED MARSHA’S FAMOUS APPLE CAKES

2. EQUIPMENT 500 ACC PAY (VISA) 500PURCHASED PANS FOR CAKE BUSINESS

3. Rent 1000Cash 1000

4. A/P Visa 250CASH 250

5. Cash 4000Sales 4000

Journal entries

Accounting Inclass Activites and Notes 40

6. Supply 50 cash 50

7. Ad 60 ACC PAY (VISA) 60

8. Draw 350Cash 350

T account practice answer

Accounting Inclass Activites and Notes 41

Transactions1. Purchased pans for my Started

business with $20002. Purchased equipment on visa

$5003. Paid rent $10004. Paid $250 on visa card5. Sold 100 cakes for $40 each6. Bought $50 flour at Costco7. Bought ad in newspaper $60 on

visa8. Withdrew $250 for draw

cashVisa (a/p)

supplies Equipment

sales advertising

2000

capital

2000

502503504000

4000

1000

50

60

500

500

60

310

500

604000

4350

50

2000

draw rent

1000350

250

1000350

TRIAL BALANCE

Accounting Inclass Activites and Notes 42

DEBIT CREDITCASH 4350SUPPLIES 50EQUIPMENT 500VISA 310Rent 1000Draw 350SALES 4000ADVERTISEMENT 60CAPITAL 2000BALANCE 6310 6310

INCOME STMT & BAL SHEET

Accounting Inclass Activites and Notes 43

MARSHA’S FAMOUS APPLE CAKESIncome statementSALES 4000ADVERTISMENT 60Rent 1000NET INCOME 2940

MARSHA’S FAMOUS APPLE CAKESBALANCE SHEET CASH 4350SUPPLIES 50EQUIPMENT 500TOTAL ASSETS 4900

VISA 310

CAPITAL 4590TOTAL LIAB + OE 4900

OWNER EQUITY STATEMENTBEG BAL $2000REVENUE 2940DRAW -350ENDING BAL 4590

Which of the following financial statements contains expenses?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

Signing a 3 year maintenance contract is an economic event recorded by the financial information system.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

The accounting process involves all of the following excepta. identifying economic transactions that are relevant to the business.b. communicating financial information to users by preparing financial reports.c. recording nonquantifiable economic events.d. analyzing and interpreting financial reports.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

The Duce Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets ata. $100 million.b. $600 million.c. $400 million.d. $500 million.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

The basic accounting equation may be expressed asa. Assets = Equities.b. Assets – Liabilities = Owner's Equity.c. Assets = Liabilities + Owner's Equity.d. all of these.

REVIEW QUESTIONSREVIEW QUESTIONS

SO 8 Understand the four financial statements and how they are prepared.

When an owner withdraws cash or other assets from a business for personal use, these withdrawals are termeda. depletions.b. consumptions.c. drawings.d. a credit line.